Management Accounting Principles and Effective Planning Tools for Managing Accounts

This report explores the fundamental principles of management accounting and its application in effective planning. It delves into various management accounting systems, cost analysis techniques, and planning tools like cash flow statements, MIS, and statistical methods. The report examines how these tools contribute to financial problem-solving and sustainable organizational success. It also highlights the importance of integrating management accounting systems and reporting within organizational processes for informed decision-making.

Management Accounting Principles and
Effective Planning Tools for Managing
Accounts
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Table of Contents
Introduction....................................................................................................................................3
Task 1..............................................................................................................................................4
Introduction....................................................................................................................................4
P1 Explain management accounting and give the essential requirements of different types
of management accounting systems.............................................................................................4
P2 Explain different methods used for management accounting reporting............................6
M1 Evaluate the benefits of management accounting systems and their application within
an organizational context..............................................................................................................7
D1 Critically evaluated how management accounting systems and management accounting
reporting is integrated within organizational processes............................................................7
P3 Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs..........................................................................8
M2 Accurately apply a range of management accounting techniques and produce
appropriate financial reporting documents..............................................................................10
D2 Produce financial reports that accurately can be apply and interpret data for complex
business activities.........................................................................................................................12
Task 2............................................................................................................................................13
P4 Advantages and disadvantages of different types of planning tools..................................14
M3. Use of planning tools and its application for preparing and forecasting budgets.........16
P5. Management accounting systems to respond to financial problems................................17
M4 How responding to financial problems can lead an organization to sustainable success.
.......................................................................................................................................................18
D3 How planning tools respond to financial problems can lead an organization to
sustainable success.......................................................................................................................19
Conclusion....................................................................................................................................20
Conclusion....................................................................................................................................21
Bibliography.................................................................................................................................22
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Introduction
The given report has been prepared with the aim of explaining the concept of management
accounting in detail. This will help every business organization and especially the top level or
strategic level of any business enterprise so as to achieve a strategic competitive advantage over
its rival firms which is crucial and imperative in the dynamic environment. For the purpose of
explaining the concept of management accounting, the report has been divided into two parts.
Each part deals with different aspects of management accounting and serves different fields of
management accounting. Consideration and detailed study of both the parts will help to
understand the limitations along with the significance and importance of management
accounting. The first part deals with the concept of management accounting along with the
computation of income as per marginal and absorption costing approach. In the same manner, the
second part deals with the planning tools and its relevance in solving financial problems in a
systematic manner.
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Task 1
Introduction
The given report has been divided into two parts covering the both theoretical and practical part.
As such, the theoretical part covers the explanation of management accounting along with the
difference between the management accounting system and management accounting reporting.
This will help to understand in a more lucid manner or way.
P1 Explain management accounting and give the essential requirements of different types
of management accounting systems.
Management accounting is concerned with the collecting, analyzing and interpreting the
information obtained from or data gathered from the financial accounting and another field of
accounting (Allison, 2014). Although management accounting has been introduced with the
alignment of financial accounting, due to the requirement and need of the top level management,
the scope and ambit of management accounting have been expanded with the increase in scope.
This has widened the boundaries of management accounting.
As of now, management accounting covers both quantitative and qualitative aspects of
management accounting (Yalcin, 2012). The main and sole purpose of management accounting
is to supply information so that the top level or strategic level can take correct and financially
viable decisions.
Image 1: Scope and ambit of management accounting
Source: By Author, 2018
It can be observed from the above image that management accounting covers both quantitative
and qualitative aspects.
The different or varied requirements of management accounting are described below. This will
help to understand the concept of management accounting in a lucid manner and can be applied
to the organizational structure of any business enterprise (Van der Stede, 2017).
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Quantitative
information Qualitative
information

Image 2: Distinct functions of management accounting
Source: By Author, 2018
It can be observed from the above figure that there are different features through which
management accounting can be explained in an easy manner. Also, the above three features are
prominent and are widely used to explain the complex nature of management accounting.
Besides, these above three features, there can be other features and characteristics as well. Thus,
the figure explaining the management accounting is an exhaustive representation and there can
be others unique features as well.
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Break even analysis
Inventory analysis
Capital budgeting analysis

P2 Explain different methods used for management accounting reporting.
There are various tools and techniques which are used or are intended for reporting of
management accounting. These tools are important since the only application of management
accounting is not important. But drawing and obtaining valid outputs from such management
accounting is equally important. This will help the reader or user of the report to understand the
data derived from the application of management accounting tools and techniques accurately and
correctly.
Selection of management accounting reporting depends on the concerned management
accounting tools and techniques applied. For instance, if cost accounting has been applied, then
cost report or product report will be relevant and appropriate management accounting reporting.
Likewise, profitability statements will be the appropriate and relevant format for the application
of financial management, another branch or field of management accounting.
Generally, there are different methods that can be employed for management accounting
reporting. Also, it is important to understand that management accounting reporting is different
from that of financial reporting. As such, financial reporting is intended for outside stakeholders.
On the other hand, management accounting is for the purpose of internal stakeholders. Thus,
information generated from the management accounting reporting can be used only by the
management and generally will not be displayed to an outsider.
Traditionally, the management accounting is also known as cost accounting. This is because
normally, the executives or senior level managers at the top level are more concerned with the
information pertaining to the cost of different products or services dealt with by the concerned
business enterprise.
However, with the passage of time, the meaning and types of the report included in management
accounting have changed and widened. Thus, all the documents derived from the application of
management accounting constitute the management accounting reporting. Thus, budget reports,
execution reports along with cost reports along with other different types of reports form part of
management accounting.
These different types of reports have been discussed in detail one by one:
Budgets: Budgets are the basic and widely used method of management accounting reporting. It
consists of benchmarks and standards that need to be achieved or fulfilled within a specified time
frame. As such, it establishes the criteria accomplishing which will help to gain a competitive
advantage over its rival firms thereby retaining the market share in the relevant industry to which
the concerned business enterprise or organization belongs. Different types of budgets that are
prepared within a business enterprise are cash budget, purchase budget, sales budget, master
budget and so on. For the betterment of result, departmental heads can be held responsible for the
preparation of different types of budgets.
Cost reports: A Cost report explains the cost structure of all the brands and products range in
which any business organisations deals. It also helps to identify the costs that can be eliminated
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of proper care and reasonable steps can be taken. This will help to place a proper control on the
costs and more amounts of profit can be earned.
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M1 Evaluate the benefits of management accounting systems and their application within
an organizational context.
Before understanding the concept of management accounting, it is primitive to understand that
management accounting system is different from that of management accounting. Management
accounting is the application of various qualitative and quantitative tools and techniques. On the
other hand, management accounting system is the formulation and implementation of output and
result derived from management accounting to draw a meaningful and informative statement
which can be applied in decision making.
D1 Critically evaluated how management accounting systems and management accounting
reporting is integrated within organizational processes.
Management accounting reporting and management accounting systems can be integrated so as
to achieve the desired or expected result. Only then the concerned business enterprise will be
able to survive in the industry in the long run. It becomes more important when there exists
perfect competition in the market. Thus, it will be advisable to apply equally both the
management accounting systems and management accounting reporting. Both these concepts can
be applied with the proper coordination and cooperation of all the departments and segments
operating within the business enterprise. Besides, there must be an appropriate regulatory
authority supervising and overseeing the operations and outcome of these two concepts.
For instance, the cost accounting and cost report should come under the charge of cost
accountant. In the case of organizations dealing with the
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P3 Calculate costs using appropriate techniques of cost analysis to prepare an income
statement using marginal and absorption costs.
Absorption costing – The absorption costing statement is prepared after considering the variable
cost of production and fixed cost of production in the costing statements of the company. The
absorption costing profit is achieved after considering the variable cost and the fixed overheads
are also included in calculating the net profit acquired by the company. The form of costing is
the traditional method of accounting in which all the costs are considered relevant for the
company without giving any specific reference to cost.
Marginal costing – The marginal costing statement is prepared after considering the relevant
cost of production incurred in the manufacturing operations of the company. The relevant cost in
this sense is concerned with the variable cost of production that is required to be incurred in the
production process. The marginal costing statement method is the method in which contribution
is calculated after considering the variable cost and the fixed overheads are then subtracted from
the contribution achieved by the company. Thus the same will require consideration of only
relevant cost for decision making purpose by the management. Thus it can be observed that it is
the modern form of accounting.
Income Statement under absorption costing:
Income Statement under marginal costing:
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M2 Accurately apply a range of management accounting techniques and produce
appropriate financial reporting documents.
Working Note:
Working Note:
Difference between marginal costing and absorption costing:
Basis Marginal costing Absorption costing
Meaning The marginal costing
technique is the modernized
costing technique in which
only variable cost of the
product is considered for
ascertaining the contribution
achieved by the product.
The absorption costing is the
conventional way of
accounting in which total
cost is ascertained after
considering fixed as well as
the variable cost of
production.
Profitability The profitability in marginal
costing is ascertained after
considering the profit volume
ratio.
The profitability is
ascertained after recognizing
the gross profit and net profit
of the company.
Classification of overheads The costs of the company are
classified between fixed and
The costs of the company are
classified as underselling,
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variable cost. administration and
distribution overheads.
Absorption rate There is no requirement to
calculate the absorption rate
for the company.
The absorption rate is
calculated after considering
the variable cost of the
company and appropriate
cost center.
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D2 Produce financial reports that accurately can be apply and interpret data for complex
business activities.
Reconciliation Statement:
The above reconciliation statement shows that the difference in profits achieved by the company
in both the costing methods is due to eth absorption rate recognized in the variable costing
method. The determination of absorption rate has been the judgment of management and it has to
be appropriate in that case.
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Task 2
Introduction
The task contains information about the planning tools used in management accounting and how
these tools help in achieving the organization goals by improving the effectiveness of
management. Further, the tools are compared with each other and the use of these tools in
different contexts has been mentioned. The other part of the task deals with management
accounting and how it helps in dealing with financial problems and preventing them in the
organization. The use of this system in the company increases the performance of the
management and improves the effectiveness of the decision making.
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P4 Advantages and disadvantages of different types of planning tools.
There are a number of planning tools that help the management of the company in managing the
enterprise effectively. These are -
Cash flow statement
Cash flow statement helps the management of the company to manage the cash flows of the
company. This statement provides information about the cash transactions of the company and
how the money is flowing in the organization. This can be either operating, investing or
financing activity.
The cash flow statement has a number of advantages these are this system ensures that the firm
never faces a financial crisis or cash crunch by ensuring a stable supply of cash. This system
helps the managers of the company to manage the cash resources. The cost of preparing cash
flow statement is extremely low. These statements ensure that the firm can effectively implement
a capital project without facing a cash shortage. This system also suffers from several
disadvantages these are cash flow statement are made as per the accounting standards so they are
quite rigid. Cash flow statements are concerned with only cash flows in the company. These
statements do not deal with any non-cash transactions this reduces the effectiveness of cash flow
statement for the purpose of financial analysis. The cash flow statement cannot be customized as
per the requirement of the company they have to be prepared as per the accounting guidelines.
Management Information System or MIS
Management information system assists the manager of the company in the process of decision
making. This system provides the managers, information for effectively managing the
organization. This system is a computerized system which contains the information about every
activity that is going in an organization. The main function of this system is to give the managers
of the company feedback about their own performance and the top management of the company
can monitor the performance of the organization by using this system. MIS is based on the
managerial discretion so it is quite flexible in this regard.
The system has certain advantages these are, this system focuses on the entire organization. It
provides the management information regarding all the departments and areas in the company.
The management information system is highly customizable. And can be altered as per the needs
of the organization. This system helps the management of the company to find all the necessary
information in one single place. The disadvantages of this system are the cost of implementing
management information system is high, the use of this system requires trained employees and
that can further increase the costs of the system, all the information provided by this system is
not perfect and it can contain flaws which can reduce the effectiveness of the decisions made.
Statistical and graphical techniques
These techniques help the management to represent the financial information of the company in
a manner that it is easily understandable. This ensures that the financial statements that are
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prepared by the accounting department are easily understandable so that the management can
make the financial decisions easily.
The advantages of this system are the statistical techniques are also customizable and can be
altered as per the needs of the company, it focuses on the presentation of the financial
information of the company in a manner that eases the decision making and the cost of using
statistical techniques is also low. A few technical experts can serve the entire organization. The
system suffers from disadvantages these are it cannot be replacement of any other management
activity it has to be used in conjunction with others, the system relies on financial statements and
cannot be used for any other purpose and the use of this system by less experienced individuals
can lead to errors in decision making.
Finally, it can be said that these systems have a number of advantages but they suffer from some
disadvantages too. If these tools are used with care they can increase the performance of the
company.
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M3. Use of planning tools and its application for preparing and forecasting budgets.
The planning tools help the management of the company in the preparation and forecasting of
budgets. Cash flow statements help in forecasting the future cash requirements and help in
drawing future plans so they are backed up by sufficient cash reserves. The management
information system or MIS provides the management necessary information which is used for
forecasting the budgets and preparing future plans for the company. This system also provides
information ensures that the projects are carried and completed on time that is it also monitors
the projects of the organization which ensures future projects are fulfilled as per the plans. The
costing systems ensure that the costs of the company are in control they also help the
management of the company in estimating future costs. These cost forecasts are necessary as
they are used in the process of forecasting. The budget also makes estimates of revenue on the
basis of these costs. The ratio analysis helps the management in estimating future liquidity
position of the company and it helps the company to prepare accordingly. The profitability ratios
can be used for estimating future growth and setting the targets. The leverage ratios ensure that
the company debt is in control and help the management to prepare the future budgets
accordingly. So, it can be said that the management of the company relies on the information
provided by the planning tools to forecast its budgets and prepare future budgets of the company.
Further, these tools provide the management of the company with endless information which
eases the process of budget making and as the information is based on research and analysis this
information also makes the process of budgeting more effective and the budgets implemented
more efficiently.
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P5. Management accounting systems to respond to financial problems.
Financial problems
If a firm is not having enough financial resources to meet its expenses, then the firm is said to be
facing the financial problem. This creates a situation of financial burden which needs to be
resolved as soon as possible otherwise the company can face serious financial problems this
includes low profits or losses or fall in the operating profit margin, etc.
Management accounting systems help the managers of the company to prevent financial
problems. The cash flow statements ensure that the firm does not face a cash crunch in the future
by informing the management of any potential shortages. The budget-making process calculates
all the expenses of the firm and ensures that the firm is prepared to meet them by making
estimates of revenue also. The budget control process controls the expenses and ensures that the
revenue targets are met. The costing system ensures that the cost of production is within the
permissible limits and this ensures high profitability for the firm. Statistical techniques present
this information in the more understandable manner thus improving the decision-making process
of the managers. The fund flow analysis analyses the movement of funds from one period to
another. This analysis is important to know how efficiently the funds are used compared with the
previous year. The decision making accounting technique is another technique which allows the
managers to choose the most profitable alternative from a number of alternatives available. The
management reporting process reports the financial position of the company to the top
management of the company this system helps the company as top management can make
changes in the policy for improving the current situation if such changes are required. The
decision-making ability and the authority improve the performance of the company. These all
techniques when used in conjunction will improve the performance of the organization and this
will ensure that the company does not face any financial problem.
Thus, it can be said that the management accounting system helps the management by ensuring
that the firm has a stable supply of cash, controlling the expenses, keeping the costs of
production in control, improving the profitability, ensuring proper budgeting decisions, better
control mechanism and analyzing the performance using ratio analysis. This ensures that the firm
is able to respond to the financial problems. The company by effectively using the above-
mentioned tools can prevent the financial crises in the first place. As the expenses are in control
and the revenue of the firm is enough to meet them. Further, the costs control ensures that the
production costs don’t increase which ensures high profits. Finally, it can be said that the
management tools help the company in preventing financial crises by making sure that the
management is working effectively.
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M4 How responding to financial problems can lead an organization to sustainable success.
Sustainable success is long-term and continued success of the company and management
accounting systems ensure that the company is able to achieve sustainable success.
It can be said that the management accounting tools help the management to prevent the
financial problems in the first place. They do this by ensuring that the cost of production is
regularly monitored so they can be kept in control. The expense of the firm is monitored using
the system of budgetary control and the revenue is monitored similarly. The cash balances of the
firm are kept in line with the help of cash flow statements. The cost analysis ensures that the firm
is able to keep the costs in control and the products that are being manufactured are being sold at
profit. The financial planning ensures that the company is able to meet the organizational
objectives that are profitability and long-term growth. These plans are monitored through control
mechanisms which prevent future deviations and correct them if they occur.
Thus, it can be said that by ensuring continued growth of the company and ensuring that the
company is able to keep its costs in control and is increasing its profitability. This will lead to the
long-term growth of the company that is it will lead the company towards the goal of sustainable
success.
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D3 How planning tools respond to financial problems can lead an organization to
sustainable success.
By responding appropriately to financial problems that is using the management tools
effectively. The management of the firm can lead an organization to sustainable success. The
cash flow statement ensures that the company has a stable supply of cash, the costing systems
keep the cost in control, the budgetary systems ensure that the budgets are being implemented
and the budgetary control system ensure that the budgets are being achieved and there are no
variations. Financial problems arise because of mismanagement and the improper planning by
the management of the company. Thereby using these planning tools the management can ensure
that the organization is controlled effectively. Further, the profitability of the firm will increase
as the costs will fall. This will ensure that the company is able to achieve long-term and
continued success that is a sustainable success.
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Conclusion
After the completion of the task, it can be concluded that the management accounting tools help
the management of the company in the process of decision making and improve the profit-
making capacity of the firm. The planning tools help the management in forecasting and
preparing budgets. These tools improve the process of decision making and ensure that the firm
is able to prevent financial problems in the company. By preventing the financial problems using
this system the management of the company can take it towards the path of sustainable success.
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Conclusion
The given report has been prepared generally and can be applied to any business enterprise.
Thus, the give report will satisfy all the different and varied types of industries. As such,
manufacturing and service oriented, small and large business enterprises can apply the concepts
covered in the given report. Applying the tools and techniques will help to resolve the financial
problems in a systematic and an organised manner. Also, the given report has been explained
with the help of various diagrams so as to facilitate the reader of the report in an understandable
manner.
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